With Health Care Legislation in Place, Cost Controls and Future Deficit Reduction Must Be High Priorities

New challenges face the health care system, the federal government and the American public now that elected representatives have completed action on historic health care legislation.

President Obama signed the main health care bill into law early last week; two days later Congress gave final approval to a "reconciliation" package of changes that had been previously negotiated by the White House and congressional leaders. Deep partisanship remained on display as Republicans delayed the final Senate vote with a flurry of procedural objections and amendments that had no hope of passage.

The reconciliation package included an overhaul of loan programs for college students. Like the health care reform legislation, the student-loan overhaul saved the government some money but then directed most of the savings into additional spending.

The new health plan promises to increase the number of Americans with health insurance by 32 million. As The Concord Coalition has repeatedly argued, however, such an expansion in coverage makes it even more critical for doctors, hospitals, patients, insurance companies and federal agencies to work together to curb rising medical costs.

Similarly, persistent tuition increases above the general inflation rate must be addressed. These increases are leaving young people with heavy debts and putting pressure on Washington to increase student aid programs. The new legislation, for example, will raise the maximum Pell grant to $5,900 over the next decade, up from $5,500 for the coming school year. Yet that will cover only a small portion of the expected tuition increases over that period.

The Congressional Budget Office estimates that the new health care plan, through tax increases and funding cuts, could cut federal deficits by a total of $124 billion over the next 10 years. While such deficit reduction would be welcome, that estimate assumes there will be no backsliding from some very ambitious Medicare cost savings. Moreover, more than half of the promised deficit reduction ($70 billion) comes from premiums dedicated to future benefit payments for a new long-term care entitlement (CLASS).

And even if all goes according to plan, $124 billion in deficit reduction is just a drop in the bucket compared to the trillions of dollars in addition debt that the United States is expected to rack up in the next decade. So the President and Congress must continue to search for more substantial deficit reduction. Furthermore, Washington must eventually pursue legislation in which deficit reduction is the primary goal.

CBO Analysis of President's Budget Shows Growing Difficulties in the Next Ten Years

Analysis of the President's Budget

The nonpartisan Congressional Budget Office (CBO) has released a new analysis of President Obama’s proposed budget that underscores the need for more fiscal responsibility if the U.S. wants to avoid a dangerous accumulation of debt over the next 10 years and beyond.

If all of the President’s proposals are enacted, the CBO says, federal debt held by the public would climb to $20.3 trillion by the end of 2020 . That would be up from $7.5 trillion at the end of last year. (“Debt held by the public” does not include money borrowed from certain government accounts, notably the Social Security trust fund.)

This projection means debt held by the public would rise from 53 percent of the Gross Domestic Product (GDP) at the end of last year to 90 percent in 2020. Many analysts sound warning sirens when a nation’s debt exceeds 60 percent of GDP – a level we will pass this year.

The President’s plan to extend many of the Bush era tax cuts would slice deeply into federal revenue although some of that loss would be regained through proposed tax increases. In total, the President’s budget would shave $1.4 trillion from revenues that the government would receive if current law were followed and the tax cuts allowed to expire at the end of the year. Revenues would average 18.9% of GDP between fiscal years 2011 and 2020.

At the same time, the president’s policies would increase spending by $2.3 trillion over current law and spending would average 24.1 percent of GDP. In an ominous sign, spending would be growing significantly faster than revenues by the end of the 10-year period. The 2018 deficit would be 4.8 percent of GDP but would grow to 5.6 percent of GDP by 2020. This reflects the accelerating growth of entitlement programs plus net interest, which would add a combined 0.9 percent of GDP to spending between 2018 and 2020. By contrast, revenues would grow by only 0.2 percent in that time.

Interest on the federal debt would jump from 1.4 percent of GDP this year to 4.1 percent in 2020. The government now enjoys low interest rates but will face more difficulties when those rates start to rise.

Under the President's budget, annual deficits average $976 billion, or 5.2 percent of GDP. By 2020, the projected $1.3 trillion deficit would equal 84 percent of all discretionary programs.

Since cutting 84 percent of the discretionary programs would clearly be an unrealistic and undesirable way to try to balance the budget, policymakers will have to consider entitlement spending cuts and revenue increases to at least make a meaningful dent in the deficit. There should be no pretense that all will be well once the economy recovers, or that simply cracking down on earmarks and waste will be sufficient. The budget already assumes a robust economic recovery and a three-year freeze on non-security appropriations.

The Concord Coalition's plausible baseline has been updated to reflect the numbers in the CBO’s new budget analysis. Concord’s baseline also adds in the effects of the new health reform law. For more on the Concord Coalition's plausible baseline, click here.

Trustees of the Social Security system have long warned that as more and more baby boomers retired, Social Security would eventually start sending out more money in benefits than it was collecting from its payroll tax. At that point the government -- unless it was prepared to cut benefits -- would need to find additional money for Social Security elsewhere in the federal budget or borrow still more money year after year.

Well, we’re here. It now appears that Social Security will reach this troubling watershed this year – at least six years ahead of schedule. That’s according to Congressional Budget Office projections that Stephen Goss, chief actuary of the Social Security Administration, says will probably prove to be on target.

Goss told The New York Times that the country’s economic problems were responsible for the deteriorating situation. Job losses cut into Social Security’s revenue because the lost paychecks were no longer available for the government to tax. Meanwhile, the system started paying out more money than it had anticipated because many of the unemployed decided to start collecting Social Security benefits earlier than they had planned.

Even when the economy is stronger, however, Social Security will still face increasingly severe difficulties as more and more baby boomers retire and start drawing benefits. That’s why The Concord Coalition has been calling for fundamental reforms in the program since the early 1990s.

On paper, Social Security has a large amount of money in a trust fund. But this money is invested in government bonds; if Social Security needs to cash in some of those bonds, the federal government must still find the money somewhere else to pay them off.

The Social Security trustees are expected to issue their own projections in their annual report within the next few weeks. Those numbers, however, are not expected to differ greatly from those of the Congressional Budget Office.

The system’s deteriorating financial picture underscores the need for sweeping changes. The president’s new bipartisan fiscal commission is expected to study possible changes in the big federal entitlement programs, and some in Washington are speculating that the Obama administration could be planning to tackle Social Security reform within the next year.

President's Fiscal Commission, with All 18 Members Named, Can Soon Get Down to Work

House Speaker Nancy Pelosi has named the last three members of the 18-member bipartisan commission that will try to chart a more responsible fiscal course for the nation.

The new Democratic appointees are Rep. John Spratt of South Carolina, chairman of the House Budget Committee; Rep. Xavier Becerra of California, vice chair of the Democratic Caucus, and Rep. Jan Schakowsky of Illinois, a member of the House Energy and Commerce Committee.

They will join three Democratic senators, six Republican members of Congress and six presidential appointees on the National Commission on Fiscal Responsibility and Reform. President Obama established the commission last month to recommend ways to reduce deficits over the next few years and address the longer-term fiscal challenges that threaten the country’s economic future. Its recommendations are due Dec. 1.

The Concord Coalition and other “deficit hawks” have cheered the establishment of the commission and urged it to put everything – including entitlement program cuts and tax increases -- on the table. Co-chairs Erskine Bowles and Alan Simpson have promised to do so.

For the commission to make a recommendation, at least 14 of the 18 members must agree to it. That sets a high hurdle that won’t make the panel’s job any easier. But even if its members have trouble reaching a final consensus, their work in the coming year should focus more public attention on the nation’s fiscal difficulties and could help identify possible solutions for Congress and the President to pursue.

With health care reform signed into law, Congress turned its attention to a backlog of legislation intended to spur job creation and extend assistance to the unemployed. Approving extensions of unemployment benefits has been a particularly contentious process for members of Congress.

The House passed a month-long extension of unemployment benefits earlier this month but did not include any offsets to pay for the $9.2 billion bill. Democrats have designated unemployment insurance extensions as emergency spending, which means they are not subject to pay-as-you-go requirements.

On Friday Senate Republicans blocked the House bill, saying its cost should be fully offset. With Congress out of session for two weeks, unemployment benefits will lapse next week for workers who have been out of work for six months or more.

In terms of cost-effectiveness, the Congressional Budget Office has indicated that among numerous suggested stimulus measures, cutting payroll taxes and increasing aid to the unemployed provide the most economic stimulus per dollar spent.